Lemley Yarling Management Co
309 W Johnson St
Madison, WI 53703
Comments on activity in client accounts
26 March 2021
We are heading to the country for a week so there will be no post on Good Friday. Next post will be April 8
Our trading luck failed this week and it cost us and our clients one half of the gains we made this year. We chose to exit our trading stocks and hold most of the cash while deploying a bit in dividend payers. The markets are trendless and moving up and down on a daily basis from overpriced tech to overpriced value on small changes in the interest rate on the 10-year treasury. Oil has jumped down and up 5% this week on rising inventory reports (negative) and the container ship stuck in the Suez Canal (positive).
All in all, the markets look tired- as are we. As March ends, we own Verizon, AT&T, Glaxo Smith Kline, Macy's and Ford.
We get letters (E-mails):
I have been wanting to write with a question about stocks. Now it is about 4 to 6 months ago, I heard something on NPR or an article I read that I thought sort of led the listener/reader to believe the Fed was buying stocks to buoy the stock market. Later I heard another reference to that that might make more sense as I thought it said that the Fed was making favorable policy decisions to keep the stock market floating high. Do you have any insight into this type of thing?
Years ago, I thought I could study the market and make decisions as to what to buy and sell based on what was happening in various markets, etc. I put a lot of effort in that, but failed. Anymore, especially this last year, I've come to conclude the market has little to do with economic realities, such as record numbers of people out of employment, but the market has soared even higher setting records. So, I've concluded the market is not based on how businesses are performing, but I'm sure at a loss to understand what makes it tick. Hence my interest in the question in the previous paragraph.
Regarding your question about the current market, join the club. Having been in the business for 50 years and luckily having survived I should have an answer but I don't. I am in the camp that the stocks leading the markets higher are for the most part wildly overvalued. Even those that have new applications and ideas like Zoom and Roku and Tesla – all of which will survive – are at levels seldom seen except in periods of excessive optimism.
My personal philosophy has been to invest to seek a reasonable return while avoiding any serous capital losses. With that in mind, I have -for the last 30 years- traded for singles and let others hit home runs. This developed philosophy was the result of the 1987 Crash and its effect on me.
As to your Fed question: The markets on Tuesday morning in late October 1987 -after the Monday Meltdown -were within minutes of a total dissolution of price discovery when more than a few observers believe that the Fed encouraged Goldman Sachs to begin buying S&P futures on the Chicago Board of Trade which stemmed the panic.
Also, I wouldn't be surprised to learn that the Fed encouraged Goldman or some other entity to buy S&P futures in March 2009 when the markets bottomed. As a matter of policy, I don't think any one will know for many years.
But I don't think the Fed is currently buying common stocks. They are- or were- buying some high yield bonds and I think convertible bonds which act like stocks. (The Japanese Central Bank does buy stocks.)
The 1987 Crash was the result of the belief that the newly created S&P futures could protect against market losses no matter how fully invested an institution was.
The 2008-9 Crash was the result of the creation of Mortgage-Backed Securities that were supposed to limit risk but were bastardized by banks and Investment firms moved by greed to create mortgages to sell that had no possibility of being honored by the folks who took out the mortgages.
The current market is reminiscent of the 1998,99, 2000 run to extraordinary heights versus actual earnings. That was known as the dot com boom.
This time a new investment theory has evolved that growing sales are all that matter and that earnings don't because eventually the companies will earn money. Amazon is held up as the example of sales growth versus earnings. AMZN hasn't had any significant earnings in its 30-year history until the last few years and even now the shares are priced at 60 times earnings. In every market period there are exceptions to the rule and Amazon has been that exception to the old economic measure that earnings do matter. But, in reality, Amazon did drop 90% from its high in 2000 to the bottom in 2001. ($106 to $6). AMZN did not return to its 2000 high till 2010. Microsoft did not return to its 2000 high until 2015. QUALCOMM just returned to its 2000 high last year. All three survived but I doubt that many of the folks who bought any of these stocks in 2000 waited the ten or more years necessary to recover their initial investment
My takeaway is that there are good companies with good ideas that will survive and prosper. But when reality hits the fan earnings, or lack thereof, matter. In overvalued markets, I have since 1987 maintained large cash holdings. The collapse last March and rapid recovery have encouraged investors to believe that collapses are short term events and that the bull market that began after the 2008-9 bear market continues. Most of the folks running money and trading with Robinhood are not old enough to remember the pain of 2000 that many fully invested dot com investors endured. Even 2008-9 is an idea not experienced by folks under 30.
Markets anticipate 6 months to a year out and so the economic recovery this year is proving last year's market action correct. But the prices to which the favorites have risen are presuming nirvana and current price levels for many favorites are the result of too much money seeking too few goods. That's classic economic theory.
The Fed has added trillions of dollars to the economy and is keeping interest rates extraordinarily low at levels not seen since the 1950s.
And low interest rates have forced many savers to move to ETFs to try and receive some gain to replace interest income that would have been earned from in bonds or C/Ds that were paying 5% or more for the last 40 years until the 2008-9 recession.
In effect the Fed has been rescuing reckless bank and investment firms from their greedy mistakes of the mortgage fiasco of 2006 to 2008 by forcing individuals to accept low to minimal interest income or to invest in the stock market. The creation of ETFs by those same investment banks has fueled the rise in the stock market by making market investment easy for individual investors. No need to choose individual stocks in an industry- buy the industry or the whole market. And hedge funds have had a profitable heyday by arbitraging with their fast computers pricing between ETFs and the underlying securities. In other words, the Street always wins. Happily, investors have also won but as the markets rise risk versus reward becomes more real.
And so, I have been maintaining an 80% or more cash position and have been trading for short gains while moving to cash quickly when I perceive risk. My approach is not the usual market advice and it takes concentration on a daily basis. I did well and significantly outperform in the 1987 and 2000 and 2009 crashes but missed the first five years of the recovery after 2009 as my age and risk vs reward philosophy caused me to not understand that the effect of the large cash infusion by the Fed and resulting abnormally low interest rates left investors with only the stock market and ETFs specially to seek gain. The last 3 years I have matched the markets while mitigating the risk.
The markets are in a greed mood- and have been for the past few years with the March 2020 crash and swift recovery only encouraging the no risk only reward attitude.
Markets usually return to the mean which has been averaging a gain of 9% since 1900. But that average has seen years of large up and 30% and greater downs (1929, 1932, Depression years, 1943, 1974, 1987, 2000, 2008). The problem with the down years is that many individual investors who are fully invested when they commence can't stand the pain and abandon stocks. Hedge funds that suffer large losses just close down and the owners begin new ones.
If you can stand the pain buy and hold will work but given current market levels wait until there is a major correction. It is hard to listen to others making huge dollars while you sit in cash but patience will be rewarded. If you are fully invested raise some cash. If you survived last March by not caring then less cash than more may make sense. But I doubt many folks were nonchalant about the March 2020 Collapse.
Chag Pesach Sameach! And Happy Easter!
19 March 2021
We continue to trade with positive results. We now own Walgreens, Wells Fargo, Royal Dutch, Carpenter Steel, Macy's, General Electric, Ford and Marathon Oil. This week we profitably traded GE, Wells Fargo, Macy's, ARK, Western Digital and Gilead; and lost money on second Ark trade and Verizon.
Every week a new warning sign arrives signaling caution. This week it was an article in the NYT on the boom in penny stocks.
Enjoy the Spring Equinox tomorrow.
Penny stocks are back
Of all the trading manias in recent months — Bitcoin, SPACs, meme stocks, nonfungible tokens — the latest has a long history of fraud and scandal. That's right, penny stocks are booming, according to The Times's Matt Phillips, who visited the "low-rent district of Wall Street."
There were 1.9 trillion transactions last month on the over-the-counter markets, where such stocks trade, according to the industry regulator FINRA. That's up more than 2,000 percent from a year earlier, driven in large part by the surge in retail trading — enabled by commission-free trading from online brokerages — that has also stoked the frenzy for shares in GameStop and other speculative assets.
Penny stocks have always lent themselves to quick fortunes, given that small inflows to these low-priced, thinly traded shares can make prices go berserk. That also makes them prone to fraud like pump and dumps, updated for the modern age with schemes hatched on social media. "It's all just a pool filled with sharks," said Urska Velikonja, a law professor at Georgetown. "It's where the unwary go to get eaten."
Penny-stock frenzies are common in raging bull markets. The current fervor among retail traders presents unnerving echoes from the past, according to Tyler Gellasch of the nonprofit Healthy Markets Association. Based on the scale of the recent mania, "the only relevant historical precedent seems to increasingly be the days before the Great Depression," he said.
Take it from Jordan Belfort, of "The Wolf of Wall Street." "Everyone wants to get rich," Mr. Belfort, a former "boiler-room" operator who pleaded guilty to market manipulation, told Matt, "and they want to get rich quick." He added that an element of naïveté underpinned such trading: "We all want to believe in Santa Claus, the Tooth Fairy and Bernie Madoff."
12 March 2021
We traded this week (see below why we are afraid) for scratch gains and finished the week owning Ark Fintech, Verizon, GE and Ford. During the week we traded Verizon, ARKK, ARKF for scratch or scratch profits, Macy's for $1 gains twice and Western Digital for a $1 loss.
We also took a small loss on a GE trade after the company announced a 1 for 8 reverse split. GE wants to get the price of its shares higher and shrink the shares outstanding. But the reverse split will change the folks who invest in the shares which may lead to a slowdown in bullish buying before the reverse split becomes final in May when institutional investors may be more likely to consider purchase. Also, J P Morgan's analyst Steve Tusa maintained his $5 price target after GE's investor day on Wednesday. We did reenter the trade on Friday 10% lower than where we sold when the share price seemed to stabilize. Several other analysts affirmed their buys and $17 price targets and Boeing announced more 737 Max orders (with all the tests it must be the safest plane flying) which of course benefits GE's engine business.
When we learn of speculations like these, we want to be all cash. And we realize how old we are.
The Twitter CEO shared a link Friday afternoon to a platform called "Valuables," where his March 21, 2006 tweet "just setting up my twttr" was up for bidding. The highest offer is from Sina Estavi, CEO of Bridge Oracle, for $2.5 million as of Saturday afternoon, according to the website.
Ownership of these assets is recorded on a blockchain — a digital ledger similar to the networks that underpin bitcoin and other cryptocurrencies. However, unlike most currencies, a person can't exchange one NFT for another as they would with dollars or other assets. Each NFT is unique and acts as a collector's item that can't be duplicated, making them rare by design.
What Are NFTs, Anyway? One Just Sold for $69 Million.
"Nonfungible tokens" and blockchain technology are taking the mainstream art world by storm, fetching huge prices. We explain, or try to.https://www.nytimes.com/2021/03/11/arts/design/what-is-an-nft.html
SEC Sighs, Shakes Head, Feels Compelled to Say, ‘We're Not So Sure About This Charlie Sheen SPAC'
The Securities and Exchange Commission is certainly wrestling with some weighty, difficult matters right now: ….So, for instance, you might not think it would be necessary to issue a press release imploring the yokels to think long and hard before investing everything in, say, MuncheeCoins. But, of course, the SEC knows better. And speaking of crypto-shenanigans, it also knows from experience therein the irresistible urge to throw money at anything endorsed by an A-lister like T.I., Steven Seagal or John McAfee.
It is in that vein, and in a milieu in which the latest financial fad has its fair share of celebrity backers, that someone at the Commission decided to dash out this little piece of what should be common sense, especially now that it's clear SPACs can go down as well as up.
"It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment," the SEC said. The recent SPAC frenzy has attracted the attention of a number of mainstream celebrity figures such as rap star Jay-Z, tennis legend Serena Williams and National Basketball Association Hall of Famer Shaquille O'Neal who have either sponsored their own blank-check firms or joined the boards of other SPACs.
Bitcoin first, then SPACS now NFTs. Hello Emperor.
5 March 2021
Interesting weeks are becoming old hat. The NASDAQ has been under pressure all week and the S&P 500 And DJ IA were weak although they rallied Friday after an up and down and up day. The computer boys and girls and option market makers are minting money.
The ten-year is now priced at 1.5% up from 0.6% late last year. The rise in interest rates represents a 7% drop in value of ten-year Treasuries and over 15% drop in price for the thirty-year high to low.
The move higher in interest rates is the proximate cause of the selloff (don't ask why?) but the fact that the gurus now talk about price to sales rather than price to earnings as measures of value in the marketplace also has something to do with the pull back
There is a family of ETFs managed by Catherine Wood that has done extraordinarily well over the past several years. She has concentrated on the high-flying names and assets managed has grown from $1 billion to $20 billion in assets coming into this week. All her purchases are of the price to sales variety and in more than a few cases her positions are greater than 10% of the outstanding shares. As money has flowed in, she has continued to purchase shares in her favorite companies and with tag along purchases by camp followers her stocks have moved to nosebleed levels.
Beginning in mid-February her largest fund ARKK has dropped from $160 per share to $114 (down 30% in 30 days and 10% for the year). See: https://finance.yahoo.com/news/ark-innovation-etf-flood-inflows-230737809.html
Wood posts all her holdings on line daily and all her trades. In an up market with folks and the big boys and girls making follow on purchases that makes for extra juice for the stocks she is buying. Unfortunately, in a down market with no uptick rule for short sales her positions are the perfect target for the big boys and girls to have fun shorting.
We bought a bunch of stocks on Monday sold Tuesday did the same thing Thursday and sold Friday morning. All our trading left us with slight gain for the week. Time to stop trying and be happy we are up 3% to 6% in larger accounts and 10% to 20% in smaller ones.
Entering the weekend, we own Macy's and Verizon.
Beware the Ides of March.
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